Steve Blank: Don’t Give Away Your Board Seats

STEVE BLANK: I recently had a group of ex-students out to my home who were puzzling over a dilemma. They’d been working hard on their startup, were close to finding product/market fit and had been approached by Oren, a potential angel investor. Oren had been investing since he left Google four years ago and was insisting on not only a board seat, but he wanted to be chairman of the board. The team wasn’t sure what to do.

I listened for a while as they went back and forth on the matter. Then I asked: “Why should he even be on your board at all?” I got looks of confusion. Then they replied: “We thought all investors get a board seat. At least that’s what Oren told us.”

Uh oh. Red flags just appeared in front of my eyes. I realized it was time for the board of directors versus advisers talk.

Roles for Financial Investors

I pointed out that there are four roles a financial investor can take in your company: board member, board observer (a non-voting attendee of board meetings,) advisory board member or no active role. I explained that as a non-public company, there was no legal requirement for any investor to have a board seat. Period. That said, professional venture-capital firms that lead a Series investment round usually make their investment contingent on a board seat. And it sounded like if successful, their startup was going to need additional funding past an angel round to scale.

In the last few years, it’s become more common for angel investors to ask for a board seat, but I suggested they really want to think hard about whether that’s something they need to do now.

Their reaction: “But how do we get the advice we need? We’re getting to the point that we have lots of questions about strategic choices and relationships. Isn’t that what a board is for? That’s what we learned in business school.”

What’s a Board for?

I realized that while my students had been through the theory, it was time for some practice. So I told them: “At the end of the day, your board is not your friend. You may like them and they might like you, but they have a fiduciary duty to the shareholders, not the founders. And they have a fiduciary responsibility to their own limited partners. That means the board is your boss, and they have an obligation to optimize results for the company. You may be the ex-employees one day if they think you’re holding the company back.”

I let that sink it for a bit and then asked: How long have you worked with Oren?

I kind of expected the answer, but still was a bit disappointed. They said they met him twice, once over coffee and then over lunch.

I responded: “You want to think hard about appointing someone to be your boss just because they’re going to write you what in the scheme of things will be a small check.”

Now they looked really confused. They argued that they needed people with great advice who we could help them with their next moves.

Advisory Board

“Do you know what an advisory board is?” I asked. From the look on their faces, I realized they didn’t so I continued: “Advisers are just like they sound. They provide advice, introductions, investment and visual theater – proof that you can attract A+ talent. An adviser that provides a combination of at least two of these is useful.”

A “board” of advisers is not a formal legal entity like a board of directors. That means they can’t fire you or have any control of your company. While some founders like to meet their advisers in quarterly advisory board meetings, most companies don’t really have their advisory board meet as group. You can connect with them on an “as needed” basis. While you traditionally compensate advisers by giving them stock, I suggest you ask them to match any grant with an equal investment in the company – so they have “skin in the game.”

Equally important in an advisory board is a great farm team for potential outside board members. It allows you to work with them over an extended period of time and see the quality of their advice and how it’s delivered. If they are world-class contributors, when you raise a Series A round and you need to bring in an outside board member, picking someone you’ve worked with on your advisory board is ideal.

Finally I suggested that Oren’s request to be chairman of a five-person startup seemed to be coming from someone looking to upgrade his or her resume, not to optimize their startup.

No Outsiders Until a Series A

As we wrapped up, I offered that there was no “right answer” but they should think about their board strategy as a balance between the amount of control given to outsiders versus the great advice outsiders can bring. I suggested that if they could pull it off they might want to consider keeping the board to the two founders for now, surrounded by great advisers, which may include their seed investors. Then when they got a Series A, they’ll probably add one or two professional VCs on the board with one great adviser as an outside board member.

As my former students left my home, they started to go through the experienced executives they knew and who they were going to take out for coffee.

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